We recently downgraded leading business consulting, technology, engineering and outsourcing services provider company Infosys Ltd. (INFY) to Underperform based on its poor performances during last few quarters.
Why the Downgrade?
The company’s fourth quarter 2013 earnings were down 3.7% year over year and 2.6% sequentially. Year-over-year earnings were impacted by a decline in margins and challenging global economic conditions. Operating margin also contracted 623 basis points year over year to 23.6% from 29.8% in the comparable prior-year quarter.
The decline in margin was primarily attributable to the company’s liberal pricing strategy to improve volumes and sales going forward. With this, the company’s future outlook also looks endangered with revenue guidance lower than 12%-14% growth of the industry as predicted by the industry body Nasscom.
Infosys operates in a highly competitive and rapidly changing market. The company expects intensified competition from established companies like Accenture plc. (ACN) and Deloitte and from new entrants in the market. In particular, the company expects increased competition from firms that strengthen their offshore presence in India or other low-cost locations and from firms in market segments that Infosys has recently entered.
Infosys has been witnessing falling earnings estimates on the back of modest fiscal fourth-quarter 2013 results and low earnings growth guidance for fiscal 2014. The Zacks Consensus Estimate for the upcoming quarter decreased by a penny to 70 cents as most of the estimates were revised lower over the last 60 days.
Other Stocks to Consider
Infosys reported a modest fourth quarter and margin contraction will remain a concern going forward as the company expects to continue with its pricing policy. Moreover, Infosys’ full-year guidance reflects sluggish revenue growth amid a volatile macroeconomic environment, which is expected to hurt profitability in the near term.
Infosys currently has a Zacks Rank #4 (Sell) on the stock. Two other companies operating in the same industry include Unisys Corporation (UIS), with Zacks Rank #1 (Strong Buy), while iSoftStone Holdings Ltd (ISS) has Zacks Rank #2 (Buy)
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